TY - JOUR
AU - Caron, Justin
AU - Fally, Thibault
AU - Markusen, James R
TI - Skill Premium and Trade Puzzles: a Solution Linking Production and Preferences
JF - National Bureau of Economic Research Working Paper Series
VL - No. 18131
PY - 2012
Y2 - June 2012
DO - 10.3386/w18131
UR - http://www.nber.org/papers/w18131
L1 - http://www.nber.org/papers/w18131.pdf
N1 - Author contact info:
Justin Caron
Department of Applied Economics
HEC Montreal
3000, chemin de la Cote-Sainte-Catherine
H3T 2A7
Montreal, QC
Canada
E-Mail: justin.caron@hec.ca
Thibault Fally
Department of Agricultural and Resource Economics
University of California, Berkeley
University Hall, 7th Floor
Berkeley, CA 94720-3310
Tel: 720/237-6158
E-Mail: fally@berkeley.edu
James R. Markusen
Department of Economics
University of Colorado
Boulder, CO 80309-0256
Tel: 303/492-0748
Fax: 303/492-8960
E-Mail: james.markusen@colorado.edu
AB - International trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in production and its income elasticity of demand in consumption. In particular, we find a strong and significant positive relationship between skilled-labor intensity in production and income elasticity of demand for several types of preferences, with and without accounting for trade costs and differences in prices. Counter-factual simulations yield a number of results. We can explain about half of "missing trade", and show an important role for per-capita income in understanding trade/GDP ratios, the choice of trading partners, and the composition of trade. Furthermore, an equal rise in productivity in all sectors in all countries leads to a rising skill premium in all countries, with particularly large increases in developing countries.
ER -